GET INVOLVED

When Social Security And Medicare Really Go Bust

Volume I, Number 1 June 6, 1995

Medicare will be solvent until 2002 and Social Security will be solvent all the way to
2030, right?

Wrong. Solemnly intoned by policymakers and recited by the media, these official
bankruptcy dates have acquired great political significance. They have afforded the
Republican leadership cover for its proposed Medicare cutssince these can be depicted as
needed to "preserve, protect, and improve" a program facing near-term
meltdown--while at the same time furnishing an excuse for ducking action on Social
Securitysince its day of reckoning seems so remote. And on Medicare, they have allowed the
White House to take the opposite tack: If its bankruptcy is still seven years off, there's
no need to do "too much, too quick."

The problem is that these official bankruptcy dates have nothing to do with any real
world definition of solvency.

Most people assume that "bankruptcy" must refer to the date when the benefits
paid out of the Medicare (HI) or Social Security (OASDI) trust fund will exceed the
revenues coming in from earmarked taxes. This is not the case. By 2002 and
2030, these programs will have long since been running cash deficits--meaning that
Congress will have had to raise taxes or borrow from the public if it intends to pay
promised benefits. In fact, Medicare has had an operating deficit since 1992.
Social Security will begin running a deficit in 2013, seventeen years before its official
bankruptcy date.

What Matters is Cash In and Cash Out

Why the difference in dates? Until recently, Medicare had an operating surplus; Social
Security still does. According to trust-fund accounting conventions, Treasury must
credit Medicare and Social Security with any annual surplus of earmarked tax revenues over
current benefits--and then pay "interest" on those "assets."
Thus, when the trust funds run cash deficits, they can turn to Treasury and
redeem the IOUs for prior year surpluses. Until the IOUs are exhaustedand along with
them the trust funds' budget authority--Medicare and Social Security are deemed to be
"solvent."

These intragovernmental accounting transactions, however, have no fiscal or economic
significance. Since Treasury spends any trust-fund surpluses each year to cover general
fund deficits, trust-fund "assets" consist of nothing more than claims against
future federal revenue. The moment that Medicare or Social Security runs an
operating deficit--that is, the moment benefit payouts exceed earmarked tax
revenues--net borrowing from the public and the federal deficit go up.

Politicians of both parties love to talk about walling off trust-fund-financed
entitlements into separate boxes. The idea is that since the programs are supposedly
self-financing they shouldn't be "entangled in the budget debate." This is
nonsense. All federal revenues--whether labeled taxes or FICA contributions--are fungible.
Every dollar spent on Medicare or Social Security is a dollar that cannot be spent on
other priorities (or returned to taxpayers). And every dollar saved in these
programs reduces the deficit.

Still, let's accept this "separate box" logic at face value and ask:
Looked at as self-financing programs, what is the real impact of Medicare and Social
Security on the budget? In 2001, the last year it is projected to be
"solvent," Medicare will actually be running an operating deficit of $41 billion.
(See the table below.) That sum is the savings Congress will have to find in
Medicare that year just to keep the federal deficit from growing. And this is long
before aging Baby Boomers begin to swell the program's rolls. By 2020, Medicare's
annual operating deficit is projected to be $352 billion; by 2030, it will be $1.9
trillion.

And what about Social Security? Here the official bankruptcy numbers are even
more misleading. Looked at on a cash basis, Social Security's vaunted near-term
surpluses turn out to be much smaller than advertised: just $29 billion in 1995 (once
interest is excluded), not $65 billion. They also disappear much
sooner. By 2015, Social Security's annual operating deficit will hit $57
billion. By 2020, the revenue shortfall will have widened to $232 billion; by 2040,
it will be $1.3 trillion.

The financing gap facing our two largest entitlement programs thus yawns nearer and
wider than most policymakers pretend. In fact, on a combined basis, the entire OASDHI
system is projected to start running an operating deficit in the year 2000. All
of this of course ignores SMI, Medicare's physician benefit program, at least three-quarters
of whose rising cost will be paid for out of general revenues. And it assumes a future
demographic and economic scenario that many experts consider overoptimistic. Under
the Social Security Trustees' "high-cost" scenario, which allows for greater
population aging and somewhat slower economic growth, you can double all of the
above numbers.

Pick a Number

Beneficiaries often suppose that by paying interest on Social Security and
Medicare trust-fund assets, the government is simply living up to an obligation to them.
In truth, Social Security and Medicare are pay-as-you-go tax and transfer systems
that presuppose no consistent "payback" link between contributions and benefits.
But even if they were defined contribution programs, that would be beside the point.
Benefit paybacks are a matter of individual equity. Interest payments made to
federal trust funds are a matter of budget accounting.

The point is that this accounting is arbitrary. If Treasury can credit the
Medicare and Social Security trust funds with surpluses that were never set aside--then
further credit them with fictive interest on those fictive assets--there is no reason it
can't credit Medicare and Social Security with whatever sum is needed to "cover"
future obligations. For a precedent, Congress need look no further than the paper
assets regularly credited to the federal pension retirement funds.

Rather than the phony issue of trust-fund "solvency," Congress should focus
on what really matters: the total of all federal taxing and spending and its impact on
the deficit, the national balance sheet, and future living standards.

Annual Trust-Fund and Operating
Balances of Social Security and Medicare: 1995-2040
(in Billions of Current Dollars)